MultimediaCreated 3/10/1998 
J. Bradford DeLong
delong@econ.berkeley.edu
http://www.jbradforddelong.net
How appreciated or depreciated the exchange rate is relative to its longrun fundamental purchasing powerparity level depends on (a) the magnitude of the expected differential in interest rates between the home and foreign countries, and (b) the expected duration of the interest rate differential. The shorter the expected duration, the less will be the deviation of the current exchange rate from its ppp value; the longer the expected duration of the differential, the greater will be the deviation. The larger the differential in interest rates at any one point in time, the larger the difference between the initial exchange rate and its ppp value; the smaller the differential, the smaller the appreciation or depreciation of the exchange rate. 

ShortRun Value of the Exchange Rate Interest and Exchange Rates 
Professor
of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 947203880
(510) 6434027 phone (510) 6426615 fax
delong@econ.berkeley.edu
http://www.jbradforddelong.net/
This document: http://www.jbradforddelong.net/multimedia/Exchange_Value.html